Investment Commentary

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September 2011 Investment Commentary
By Richard W. Boyer, CFP, CFA

September 11

It was mid-afternoon and I was in Mrs. Rawlings fourth grade class. I don’t recall if there was an announcement over the school speaker or if Mrs. Rawlings told us directly, but we were informed that our school was closing for the day and we were all instructed to go home. Walk home I guess. In 1963, you could walk home without fear of being kidnapped. So we did.

The date was Friday, November 22, 1963 and our president, John F. Kennedy, had been assassinated at 12:30. When you are 9 ½ years old (at that age you always include the “½”), presidential assassinations are way down on the list of traumatic life experiences. But I remember how worried and concerned my parents were. I remember that it seemed like a traumatic life experience to them... how they watched our black and white TV all evening, trying to get the details. I doubt that they even voted for Kennedy. I’m pretty sure that in 1963 it was against the law to live in Kansas and vote Democratic. But he was our President and his assassination still made them worry for our country.

Like any decade, there seemed to be so many things to be worried about. In the 60’s there were designated bomb shelters all over every city because we were pretty sure that Russia would strike at any moment. We were convinced that Khrushchev was one of the most evil people in the world. At least that’s what I thought when I was 9 ½. So when Kennedy was assassinated, fear and concern intensified.

Anyone who was at an age of awareness in 1963 remembers where they were and what they were doing when Kennedy was shot. There have been few events in our lives that compare, but on Sunday we will look back 10 years and remember the first time we were attacked on our own soil during most of our lifetimes. September 11th was a riveting event and, like the Kennedy assassination, we remember where we were and what we were doing. We spent the next decade thinking that Osama bin Laden was one of the most evil people in the world (possibly THE most evil) and that he would organize another attack.

But we made it through the sixties with Viet Nam, protests of all kinds and the civil rights movement. We made it through the seventies with the oil embargo, high inflation and high interest rates. We made it through the eighties and nineties not really realizing at the time just how easy those two decades treated us (except for the music). Interest rates declined and the stock market rose from August, 1982 until 2000. You could stick your money in an index fund and earn over 18% per year without having to think. One didn’t have to be intelligent to appear intelligent.

The tricky thing about good times is that they can lull you to sleep. They can make you believe that bad times are a thing of the past and that things aren’t just going to remain good, they’re going to keep getting better... because they do get better. Until they stop getting better.

When things are good, it’s easy for Congress and government regulators to change the rules... to loosen the reins and extend the leash a little bit at a time. “We don’t need Glass-Steagull. Banks are different today... and they need to be more competitive.”  “Let’s make sure everyone can obtain a mortgage, regardless of income. Home prices will always increase.”  “If we keep interest rates low, the economy will just keep chugging along.”

We will make it through this decade just like we made it through the sixties, but fifty years from now they will still be talking about how dreadful this economy was. Business schools will devote entire semesters to the economic disaster of 2008.

Since 1999, if you had your money in a S&P 500 index fund through the end of August, you still have a positive return, but barely. You are up 2.74% in 11 years and 8 months, an annual average of .23%. Some industry “professionals” continue to insist that you need to trust the market and just leave your money invested. I think twelve years is long enough to question the wisdom of that theory.

After three consecutive losing months, one might have thought we would be due for a little rebound. One would have been wrong... dead wrong in fact. The S&P 500 declined over 13% in just the first week of August. The rest of August was a little better, and the S&P 500 finished the month -5.44%. It is now in negative territory for 2011.

More significantly, August heralded the return of volatility. Of the 23 trading days in August, the stock market was up or down more than 1% on fifteen days... more than 2% on ten of those days. Investors don’t like losing money but they REALLY HATE losing money quickly. On August 8th, the stock market declined over 6%. That’s losing money very quickly. The individual investor may be becoming very weary of this grind.

Valuations of stocks are becoming similar to valuations in March, 2009 when the market bottomed and began a two-year rally of over 108%. The difference is March, 2009 was near the end of that recession, which officially ended in July. It appears that today’s stock market is pricing in the fact that we may be nearing the next recession... or that we are already in it. But with the S&P 500 average dividend yield hovering around 2.25%, stocks don’t look expensive... but that doesn’t mean they won’t get cheaper. In the chart below, you can see that in March, 2009, stocks got so cheap, dividend yields were above 3.5%. 

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~Richard W. Boyer, CFP, CFA
Chief Investment Officer 

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